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Interest rate rituals and Christmas 
pantomimes

You may be forgiven for being confused about what year it is. It was almost exactly a year ago that we were engaged in a debate about the big banks and how they pass on interest rate changes.

Back then, it was the big four passing on higher interest rate rises than the RBA was dishing out. Now its their — for the moment — refusal to pass on the latest cut.

There’s plenty of ritual in all this. Wayne Swan attacks the banks. The opposition attacks Swan, and suggests that somehow — without precisely saying what — that he should be doing more to force the banks to do the right thing. The proximity of Christmas means that, yet again, the media can invoke Scrooge. The Bankers’ Association runs the same lies about cost of borrowing. Yawn.

As Glenn Dyer noted yesterday, we’re usually missing half the debate. Most of us don’t reduce our mortgage repayments when interest rates fall, so the impacts on demand and areas like retailing are limited (this is the great, overlooked flaw in the arguments of those who believe monetary policy can do the “heavy lifting” of stimulating the Australian economy in the event of another financial crisis). And the media ignores the interests of savers, who stand to lose from falling interest rates.

There’s also the simple reality that the RBA takes into account the willingness of banks to pass on rate cuts or rate rises in its decision-making. If the banks decided not to pass on any of Tuesday’s rate cut, it’ll keep cutting rates until they do, just as it took into account banks lifting rates higher than its own increases in 2010.

Instead, the real impact of the banks’ failure to pass on any cuts is on business lending, which directly affects business activity and employment. But that, too, gets ignored by the media in favour of focusing on household mortgages.

The more frustrating aspect of the debate is that it reprises exactly the issues that Joe Hockey correctly raised in 2010 and which ended up going nowhere — the need for an inquiry into the financial system and a resolution to the basic issue that banks have the role of utilities but are regulated like normal corporations. The government successfully deflected Hockey’s well-timed push for a re-examination of financial sector regulation with a limited set of reforms aimed at improving competition, but nothing that was going to cause the big four to lose any sleep — or any of their super-profits.

In truth, if people end up with the impression that Swan has been somehow remiss in his responsibilities as Treasurer by not being to jawbone the big banks into cutting rates as much as possible, responsibility for that lies with Swan himself. He had the chance to exploit a normally reflexively negative opposition’s readiness to pursue financial regulation reform last year and preferred to ring-fence the banks from serious scrutiny. The big banks remain a protected species.

The government can’t complain when they take advantage of that.

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  • 1
    Jim Reiher
    Posted Thursday, 8 December 2011 at 1:44 pm | Permalink

    Unless my memory is failing, I am sure that banks always followed the ups and the downs of the reserve bank movements, until the first interest change after Rudd won office. It is a very new game plan - only 4 years old in fact - that allows the big banks to not pass on all of an interest rate cut. Or pass on more than an interest rate rise.

    Why did it change? What happened in late 2007 to change the way it had worked till then?

    And being as old as I am, I can still remember when the Reserve Bank was given the power to set the interest rates. It used to be in the hands of the govt of the day. It was in the hands of the govt of the day for decades and decades. And then suddenly, it became “absolutely necessary” for politicians to no longer have that power, but to hand it over to the unelected leaders of the Reserve Bank.

    Oh I remember (and we still hear) the argument: govts might use interest rates as a vote buying ploy in election years: lower the rates and make everyone happier - but then, if it was a bad idea, they would have to come back later and raise them again.

    sure sure… heard it all before. Of course govts did that! Just like they give tax cuts before elections. It can be and was used that way. But think about it: no one to my knowledge says that Treasury should determine tax rates in the community - for the sake of the economy - they could go up or down one month to the next… to give the economy more flexibility and stability!

    I hate that the Reserve Bank sets the rates. But if that must be the case, then I hate it even more that there is no legislation to make the other banks follow exactly the rate that goes up or down.

    Here is a suggestion: If a bank does not lower the amount by the full amount, then the next time there is a rise in interest rates, they should not be allowed to raise it by the full amount either. They should not be permitted to have it both ways. So here is my suggestion: LEGISTATE TO MAKE IT SO! You know: governments are elected by the people for the people… they can legislate and make rules.

  • 2
    Chris Tallis
    Posted Thursday, 8 December 2011 at 1:46 pm | Permalink

    No bernard you have missed a vital point.
    That point is that if mortgage holders don’t reduce their payments they are paying off more debt and if they do then they return a very large amount of money into the economy. Both are very good for Australia. Privately held banks are the opposite.
    You are correct in saying that the banks are a protected species. What would you expect when they have so much money to put into both major political parties donation funds.
    What we as a country must demand is that we stop all forms of political donations. Nothing short of that will return governance of the people for the people.
    It is farcical to believe that political donors do so for any other reason that to glean influence from those to whom they donate. This makes a mockery of democracy and will lead us all into ruin.

  • 3
    Chris Tallis
    Posted Thursday, 8 December 2011 at 1:50 pm | Permalink

    Jim I would suggest that the banks donate to political parties so that the same political parties
    DON”T LEGISLATE TO MAKE IT SO!

  • 4
    Suzanne Blake
    Posted Thursday, 8 December 2011 at 2:19 pm | Permalink

    Its all about their borrowing rate and their profits, consumers last

  • 5
    Jim Reiher
    Posted Thursday, 8 December 2011 at 4:27 pm | Permalink

    SB - I agree. (An unusual moment for us!)

  • 6
    davidk
    Posted Thursday, 8 December 2011 at 5:25 pm | Permalink

    We saw what happened when he gov’t took on the miners, I think the same would happen with the banks.

  • 7
    AR
    Posted Thursday, 8 December 2011 at 7:37 pm | Permalink

    DavidK - remember the last time a Federal government sought to bring the banks under control. Even in that dimly perceived, prehistoric period when PR & spins doctors were barely extant, the banks managed a campaign of fear of Kommunism that gave the nation 20+yrs of Silver Ming and his spawn, the last of which, the Rodent was afflicting us until 2007. One should be careful of wishes.

  • 8
    Ron Paul 2012
    Posted Thursday, 8 December 2011 at 8:54 pm | Permalink

    4 Pillars is akin to the too big to fail policies in the US and EU.

    Central Banking is a Bust, KO the central bank, return the currency to a commodity or fixed exchange rate.

    We need to unleash more and better competition.

    Monopolies need to be broken up, Coles & Woolworth’s need to be broken up, the big four broken up with market caps on percentage size used to prevent more monopolies from forming.

    Lets look at Austrian Economics which understands why bubbles form and seeks to understand the business cycle.

    We need more banks not less, when banks enter in risky behavior and fail they need to bust.

    We need capitalism, not corporatism. Lets get the special interest groups out of Canberra, including the Business Councils and various business lobbies. It also includes social welfare groups and unions.

    WE need to de-couple markets from the government, from the average worker. There was a time when stock markets busted and the rest of the economy remained unaffected. To get back to a place like that we need to increase competition and let markets know that they cannot rely on government….ever.

  • 9
    c d
    Posted Thursday, 8 December 2011 at 10:27 pm | Permalink

    Why did it change? What happened in late 2007 to change the way it had worked till then?”

    Gee Jim, when did credit markets begin to get constipated?

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